The key to proptech investing

From writing checks for a few thousand dollars to soliciting external capital for nine-figure venture funds, investors’ approaches to investing in property technology vary as much as the startups seeking capital.

Interest in proptech investments has ballooned, from $2.42 billion in 2015 to $1.9 billion in just the first half of 2018, according to market intelligence company CB Insights.

Despite the increase in dollars and interest, a few hold-outs remain. One chief executive of a US-based investment manager that raises billion-dollar funds admits to PERE that his “leanly staffed” firm “probably should be doing something in the tech space – maybe we will after the next fund closes.”

Balancing these reluctant investment managers are the groups – investors and investment managers – betting big on proptech. Some, such as the California State Teachers’ Retirement System, are in early stages of evaluating how it can fit their platform. At CalSTRS’ July meeting, the real estate team included proptech in its 2018-19 fiscal year business plan: “Recognize the growing effect technology has on our industry and seek out relationships to engage and profit from it.”

Groups further along in their proptech investment strategies offer roadmaps to the various options for accessing the space.

Becoming VC investors

Some managers are looking to proptech-focused venture capital firms for access to dealflow and, in some cases, strategic partnerships. Los Angeles-based Fifth Wall has collected capital from Hines, Rialto Capital Management and Prologis, among other major real estate companies, for its debut $212 million VC fund.

Charlie Kuntz, Hines’ head of innovation, says the Houston-based manager decided to become a strategic partner with Fifth Wall to receive advisory services from the VC firm after committing to Fifth Wall’s first fund. While Hines may eventually invest in proptech on its own, Kuntz says the firm can access more startups through Fifth Wall’s connections than the manager could without the VC bridge. Hines’ primary fund investing goal is gaining knowledge and partnerships, not financial returns.

“Frankly, we don’t think deploying our capital into the space is the strongest component of what we can provide to new companies,” Kuntz says. “It’s working with them to say, ‘We’re a large industry incumbent that is open to trying new things.’ Just by saying we have this broader book of business that we can offer, it tends to be more powerful. We want to try new things, we want to do pilots, we want to find new ways to improve our projects. That open platform is often more powerful than capital. The investment is done to create a proper partnership and alignment.”

Hines executives also sit on advisory boards and mentorship groups for other proptech-focused VC funds and programs.

Other groups go it alone, building internal teams with the expertise to access investments and deploy capital as opportunities arise.

QuadReal Property Group, the real estate arm of British Columbia Investment Management Corporation, is making seed and equity investments in proptech and real estate operating companies, chief executive Dennis Lopez tells PERE.

QuadReal’s recent investments include seeding project management platform Honest Buildings and joining the fundraising rounds for shared work and conference space provider Convene and co-working company Industrious.

Earlier this year, the investor also partnered with Microsoft and the city of Toronto for urban pilot program UPPlift: Toronto, which seeks to improve the city’s livability through technology. QuadReal and the city picked “smart city innovations” to pilot in their properties.

“The investments we have made in the two years since QuadReal’s launch are only the beginning of what we intend to invest,” Lopez says. “While there are many benefits to investing in proptech, for us it all drives toward three objectives: distinguish the service and experience we offer tenants and residents, enhance asset value and improve the resiliency of our investment returns.”

In-house platforms

Some firms are building up capabilities to execute proptech investments in-house, through corporate VC funds and specific platforms. Property services company JLL, for example, launched the JLL Spark Global Venture Fund in June to invest $100 million of balance sheet capital in early-stage companies, PERE reported.

Investment sizes range from a few hundred thousand to several million dollars and, at launch, the fund had already made two investments, says Mihir Shah, JLL Spark’s co-chief executive. He notes the fund allows JLL to invest globally across categories of commercial real estate-focused startups, as well as build relationships with the startup teams.

“In this space, startups have had a hard time with deployment cycles because people are slow with technology adoption,” Shah says. “On the other side, you have JLL’s clients and services. It’s clear there are a lot of technologies coming on board and this helps them understand how to invest. We see the fund as the bridge between the two groups.”

In March, Spark acquired Stessa, a software-as-a-service real estate technology platform created to help investors track, manage and communicate the performance of their portfolios. In the future, Shah says Spark may acquire other existing operating businesses, in addition to its investments through the proptech fund. The platform is evaluating a few companies that may also fit with JLL subsidiary LaSalle Investment Management, though most of Spark’s investments are tailored to the parent company.

Meanwhile, some alternative investment managers, including Brookfield Asset Management, are tacking on venture platforms, rather than funds, to invest their own capital. PERE knows of at least one other private equity real estate firm set to take the same approach later this year.

Brookfield Ventures was set up earlier this year to invest $200 million-$300 million of firm capital in technology companies raising Series B and C capital that complement the parent company’s real estate, private equity, infrastructure and renewable power platforms.

As of early August, Brookfield Ventures had closed two investments totaling $70 million and was close to wrapping up its third deal, a pace that Stewart Upson, the firm’s chief executive of Asia-Pacific, says is ahead of expectations. Josh Raffaelli, formerly at technology-focused private equity firm Silver Lake, leads the venture platform out of Silicon Valley, supervising four generalist investment professionals.

Like other asset managers’ models, Brookfield Ventures is predicated on integrating and proving technology within the firm’s alternative investment portfolios. Upson says that differentiates Brookfield’s capital from a generalist VC fund.

“There’s no shortage of capital for this market,” he says. “If all you are is capital, you probably won’t see any of the good transactions… In our relationships, capital or expertise, we can make a big difference to that early-stage venture. We’ve found we’ve been really welcomed by the companies we’ve invested in.”

After eight to 10 successful deals, Brookfield Ventures could become Brookfield’s fifth vertical – venture capital. Among Brookfield’s 500 LPs, disruptor technology is a “constant topic of discussion,” Upson says.

“We’re making sure we’ve proven the thesis and we’ve tested out that we can fully translate our core asset skills into the venture space before we start taking on third-party capital.”

Investing third-party capital

Singapore-based GLP took Brookfield’s approach in investing balance sheet capital starting about five years ago, chief executive and co-founder Ming Mei tells PERE. GLP, which manages about $50 billion in industrial real estate, sought to make facilities more efficient for its management and customers. The firm saw a need from the confluence of decreasing technology costs, increasing labor costs and growing consumer preferences for fast delivery.

“We didn’t think that big at the beginning,” Mei says. “We thought we should risk our own money to understand how to help our investors be more efficient.”

GLP invested about $300 million of its own capital in 30 companies, using its portfolio as a testing ground for the proptech companies. As the firm built an innovative reputation, some of its institutional investors asked for advice and, later, to invest alongside GLP. These reverse inquiries led the firm to form its first private equity fund, Hidden Hill Modern Logistics Private Equity Fund, this year to scale the business.

Anchor investor China Postal Capital was one reverse inquirer. The company, which oversees China’s largest fleet and facilities, wanted to learn best practices and adopt new technologies with GLP’s guidance.

GLP has raised 10 billion yuan ($1.6 billion; €1.3 billion) so far for the private equity vehicle and may add a US dollar sleeve, also driven by reverse inquiries.

The firm continues to use balance sheet capital to back ventures outside of the private equity platform, particularly if it does not see a clear exit strategy. GLP is also working with its US executives to make “small investments” in the US and Japan, Mei says.

Looking forward, “we think that we are just getting started in this area,” he says. “There is a lot more that could be done.”

VC firm tacks on real estate

While property technology investments are more popular, some venture capitalists are entering traditional commercial real estate

As more real estate companies eye technology investments, a small slice of the venture capital world is starting to look at brick-and-mortar strategies.

In July, a pair of Hines executives, Starling Cousley and Clint Myers, left the investment manager to build out a real estate business at VC firm Revolution. Cousley, formerly a fund manager for Hines’ value-add and core-plus platforms, and Myers, previously Hines’ chief strategy officer, will be charged with launching a direct real estate platform focused on investing in office, multifamily and retail properties in secondary US cities.

Washington, DC-based Revolution was founded in 2005 by Steve Case, the co-founder of AOL, to invest in technology hubs outside the East and West coasts. The firm manages funds for growth, venture and seed-stage investments, with investors in the seed fund including Carlyle co-founder David Rubenstein, according to its website. Revolution has $1.3 billion in assets under management, a spokeswoman said.

Previously, Revolution invested in real estate indirectly, taking part, for example, in a Series D funding round earlier this year for shared meeting and workspace provider Convene.

Cousley says that he and Myers had spent the last three years specifically focused on learning about the US’s non-gateway cities. Last year, the pair connected with Case and JD Vance, the best-selling author of the rural America-focused book Hillbilly Elegy and Revolution’s managing partner of its Rise of the Rest Seed Fund. In meeting the executives, Cousley said he found common ground between his real estate vision and Revolution’s non-Silicon Valley VC approach, as the new direct real estate business would help make such markets more attractive for startup and growth firms.